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East through West – Will a 2nd Wave Hit the West or Have Governments Learned from their Mistakes?

Bob Mason

As the markets continue to react to the easing of lockdown measures in the West, dark clouds are gathering in the East. Or so it seems.

Following the lockdown across Hubei and beyond, in February and March, China and other economies hastily eased lockdown measures in April.

China’s private sector PMIs for both March and April reflected the effects of the easing in lockdown measures.

The PMIs also reflected the impact of lockdown measurers across the West that weighed on China and Japan’s PMIs in particular.

Global demand for both goods and services were lackluster going into May and it’s unlikely to materially change late in the 2nd quarter.

Throw in Trump’s accusations and attempts to lay the blame of the COVID-19 pandemic on China’s doorstep and the rush to open economies across the East may have been too hasty.

The East to West Migration

As was the case with the spread of the coronavirus, governments’ plans to ease lockdown measures followed a similar path.

China, Japan, and South Korea were amongst the 1st to announce plans to ease confinement measures.

We have since seen Italy, Germany, France, and Spain and other EU member states make similar moves.

Even the U.S administration has made its initial moves to ease confinement measures.

Ulterior motives

The EU and the East eased lockdown measures in response to falling new cases.

When considering how bad things were in Italy and Spain, recent COVID-19 numbers continue to impress. In fact, the numbers across the EU as a whole are far more impressive than those from the U.S.

The reason for this was the eventual shutdown of borders. One does wonder whether the catastrophe could have been avoided. Had EU member states agreed to shut down borders back in March, things may have been quite different…

For the U.S, it seems clear that the U.S administration is focused on the November Presidential Election.

An extended lockdown and the worst economic crisis in history would surely be the end of the Republicans.

This is assuming, of course, that Biden makes it to Election Day. The last thing Trump will want is to be tagged as the President that overshadowed the Great Depression…

Geopolitics

Trump continues to pass the blame of the U.S pandemic onto China and this is unlikely to change any time soon.

That time may eventually come, however.

We have seen the markets react to news of new clusters across Asia that have contributed to a decoupling across the equity markets this week.

The Asian equity markets have come under pressure, while the European majors have avoided a sell-off. For the U.S majors, it was a relatively positive start to the week.

For Some, blaming China once may be plausible, blaming China twice is an altogether different story.

Trump has stated that the opening of the U.S economy must continue irrespective of any impact on COVID-19 cases.

With the November Presidential Election now just months away, Trump has little choice but to take a chance. Why the Republicans are happy to go along for the ride is perplexing.

The price that the U.S population will pay, if it all goes wrong, will be horrific. Trump’s only hope is for an effective treatment drug and vaccine to be rolled out in the coming months. And, hopes that the U.S summer season will kill the virus…

A 2nd wave in China and South Korea suggests that climate has little to do with it… So, there is no place to hide out over the summer months.

Market Focus

On the economic data front, we are beginning to move through to May data, which will be particularly important.

April will need to have been the bottom for the markets to continue to believe in a relatively speedy economic recovery.

Dire employment numbers and PMIs in May coupled with a pickup in the daily COVID-19 numbers and we could be in for a far more severe market shock.

Either way, if the 2nd wave continues to gather pace across the East, expect the same to occur in the West.

Asian governments have been far more restrictive on travel and border control… The UK government only announced a 14-day quarantine for people entering the UK last week. That’s somewhat behind the curve…

For the U.S, it’s not just international borders but also state borders that need to be marshaled.

A 2nd coronavirus wave across the EU and the U.S is an unimaginable prospect.

The markets managed to take dire economic data, not seen in the post-war era, in its stride.

The outcome will be very different at the second time of asking and next time around the blame will lay squarely with those governments in a hurry to reopen.

At the time of writing, the EUR was up by 0.12% to $1.08194

How bad can it get? Well, a global depression stemming from an indefinite lockdown is what governments are trying to avoid.

A 2nd wave will not only leave international borders closed indefinitely but also leave governments to face civil unrest.

For the eternal optimists, an effective treatment drug is delivered on a global scale and there is no 2nd wave on the grand scale of the pandemic. We have yet to even hear of any evidence of mutation that could be the primary reason for the 2nd wave…

There is one other consideration for the markets, should a 2nd wave hit… A marked acceleration in inflationary pressures stemming from a sheer lack of availability of non-durables.

This article was originally posted on FX Empire

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